It is expected that LeDow L60 will deliver over tens of thousands in December, with a full vehicle gross profit margin of 15% in the fourth quarter (Nio 2Q24 conference call minutes)

Nio FY24Q2 Earnings Call Summary:

The following is the summary of Nio's performance in the second quarter of 2024. For financial report analysis, please refer to " Nio: Rarely Not Collapsing, Joyfully Supporting the Future? "

I. Review of Core Financial Information:

II. Detailed Content of Earnings Call

2.1. Key Points from Management's Statements:

1. Business Progress

① Market Performance

a. In the first half of 2024, Nio completed the update of its 2024 new models, further enhancing the competitiveness of the NT2.0 platform products. In the second quarter, Nio achieved a record high delivery of 57,373 vehicles, a year-on-year increase of 143.9%.

b. In the Chinese market, Nio's models hold over 40% market share in the pure electric vehicle market priced above 300,000 RMB. Since the third quarter, Nio has continued to optimize its product portfolio, delivering 20,498 vehicles in July and 20,176 vehicles in August, with an estimated total delivery volume of 61,000 to 63,000 vehicles in the third quarter.

② Product and R&D Progress

a. On July 27th, at NIO Day, Nio launched the full-domain operating system SkyOS and the intelligent system Banyan 3, and successfully introduced the self-developed intelligent driving chip Shenji NX9031.

b. Nio also introduced the AEB function based on end-to-end architecture in July, with a scene coverage rate 6.7 times that of traditional AEB.

c. Additionally, Nio released the NIO World Model (NVM) intelligent driving architecture and plans to introduce new features and experiences for the NAD ARC2 system in the second half of 2024.

③ ONVO Joyfully Supporting

a. The household brand ONVO will launch its fourth model L60 on September 19th, with user deliveries starting at the end of September.

④ Sales and Service Network

a. Nio has 161 Nio Centers, 408 Nio Spaces, 35 service centers, and 63 delivery centers.

b. The ONVO brand has opened 105 stores in 55 cities, with an expected total of 200 stores by the end of the year.

c. Nio has deployed 2,561 battery swap stations globally, providing over 52 million battery swaps. Additionally, Nio has installed over 23,000 charging piles. The continuous expansion of the charging network will help Nio and ONVO increase market penetration and drive sales growth ⑤ Future Outlook and Corporate Vision

a. Nio is accelerating its international expansion, and products in the UAE market will be launched and delivered in the fourth quarter.

b. In the NEV quality study released by JD Power, Nio's various models rank first in their respective sub-markets and have maintained this honor for six consecutive years.

2.2 Analyst Q&A

Q: Since the pre-sale of the L60 started in mid-May and the number of reservations has reached tens of thousands, showing a very strong performance compared to recent releases of other new models. How will you ensure a high conversion rate after the official launch on September 19? Will the company consider more competitive pricing to address market competition? Additionally, what preparations has the team made in terms of customers and the supply chain to avoid potential supply interruptions after deliveries begin?

A: On August 15, we witnessed the first mass-produced L60 officially offline. Currently, the sales manager of the ONVO brand is driving this car on a roadshow in China, having driven for nearly 20 days and live streaming on social media, attracting widespread attention with daily viewership reaching millions.

Regarding the pre-sale situation, orders for the L60 have exceeded our expectations, giving us full confidence in the overall competitiveness of this model. In terms of pricing strategy, when the pre-sale of the L60 started in mid-May, the pre-sale price announced was RMB 219,900, about RMB 30,000 cheaper than the Model Y. When officially launched on September 15, our price will definitely be lower than the pre-sale price, but overall, we will find a balance between product price and vehicle profit margin and will not adopt an overly aggressive pricing strategy as we need to ensure reasonable profitability for the project.

In terms of the supply chain, we have prepared for the L60 with a target of delivering 10,000 units in December, hoping to increase to 20,000 units per month at some point next year.

Q: We noticed that in the second quarter, monthly sales of Nio brand models remained stable at around 20,000 units. Looking ahead, do you think there is still room for further increase in sales and gross profit margin for the Nio brand based on the existing product portfolio? Could you share the potential drivers for the increase in sales and gross profit margin of Nio brand models?

A: Regarding the gross profit margin of Nio brand vehicles, we achieved 12.2% in the second quarter, mainly due to supply chain efficiency and production improvements. Over the past four months, our monthly delivery volume has exceeded 20,000 units. We also see further optimization opportunities, including optimizing product costs and increasing the proportion of high-margin products in the product portfolio through marketing.

Through these measures, we aim to gradually increase our overall vehicle gross profit margin in the third and fourth quarters of this year, with the goal of reaching 15% by the fourth quarter.

In terms of volume, we believe there is still room for growth, but we will maintain a balance between vehicle delivery volume and gross profit margin during this process, ensuring that both improvements are gradual. However, we do not expect a significant surge in volume. Our ultimate goal is to achieve better overall profitability by balancing these two aspects In the long term, Nio's high-end market target for electric vehicles is priced at over 300,000 RMB. With the introduction of new products and upgrades to existing products, we believe that achieving a monthly delivery volume of 30,000 to 40,000 units is a reasonable goal. In summary, Nio's main brand's long-term operational goal is to achieve a monthly delivery volume of 40,000 units and a 25% vehicle gross profit margin.

As for the Leda brand, it targets a larger market with a potential market size of over 8 million units. Leveraging our "Battery as a Service" (BaaS) model and a well-established charging and swapping network, ONVO's products will have strong competitiveness in the market. Therefore, the Leda brand has significant growth potential in monthly sales volume, with a long-term goal of achieving a 15% or higher vehicle gross profit margin, which we believe is a reasonable target.

Q: Regarding the sales target for ONVO L60. Previously, you mentioned a target of about 20,000 units for this year. Considering the current order situation, do you still maintain this target? Can you provide detailed progress for October, November, and December?

A: Regarding the situation of ONVO L60, although we will start delivering products at the end of September, the production and supply of new products will take some time to ramp up. Therefore, most deliveries for this year will be concentrated in the fourth quarter.

Deliveries will start in September, but the initial delivery volume will not be significant. We hope that by December, the monthly delivery volume can reach around 10,000 units. In terms of supply, as this model incorporates many new technologies, the production capacity of the supply chain also needs some time to improve.

Q: Regarding Sales, General, and Administrative Expenses (SG&A). Currently, this expense is continuously increasing. What are your expectations for future quarterly expenses? Can you provide guidance on expenses for the second half of the year by quarter?

A: In terms of expenses, they are mainly divided into two categories. The first category is research and development expenses. We will continue to maintain a strong quarterly investment in research and development. In terms of Non-GAAP, it will be maintained at around 3 billion RMB per quarter, but there may be some fluctuations or slight differences between quarters depending on the actual progress of research and development activities.

The second category is Sales, General, and Administrative Expenses (SG&A). As mentioned earlier, we will start delivering the L60 project at the end of the third quarter, which will lead to an increase in SG&A expenses. However, as the delivery volume of the L60 project increases, we will continue to optimize the proportion of SG&A expenses to total sales revenue to improve cost efficiency.

Q: With the expected delivery volume of 10,000 units for ONVO L60 in December this year and around 20,000 units next year, what do you think the reasonable gross profit margin for this model would be? Additionally, as the delivery volume gradually increases, what are our capacity expansion plans and capital expenditure plans for 2025 and 2026? Can we expect higher capital expenditures in the future than in 2024?

A: Regarding the L60, when its overall production reaches reasonable expectations, we believe a 15% vehicle gross profit margin can be achieved. Of course, considering the intense market competition, we have also reserved some room for flexibility in variable marketing of the product. However, overall, the L60 emphasizes efficiency and cost control in design, so a 15% gross profit margin is a reasonable target. We have successfully found a balance between technological advancement and cost competitiveness Regarding production capacity planning, we have established medium to long-term production capacity plans for 2025 and 2026. Currently, we have two factories in operation, with our F2 already running double shifts to support L60 production. The upgrade to double shifts is expected to be completed by the end of September or early October. Additionally, we are planning for a third factory, which is expected to be operational in the third quarter of next year (anticipated in September). This means that by the third quarter of next year, we will have three factories in operation, sufficient to support our production needs.

Overall, we believe that production capacity will not be a bottleneck for us, especially in the long term. In China, the production capacity for automobiles and components is very strong. While some companies may face short-term production and supply disruptions, this will not be a bottleneck in the long run. Especially since we obtained independent manufacturing qualifications last year, laying a solid foundation for our long-term stable production capacity.

Q: Regarding sales and marketing expenses. Our SG&A expenses increased by over 30% in the second quarter. Could you please provide detailed information on which sub-projects saw the fastest growth? Also, are sales policies included in SG&A expenses?

A: Regarding capital expenditures (CapEx), we are exercising cautious control and management over investments and expenditures, especially since last year, where we have postponed or canceled certain projects to better manage the pace of spending. Overall, R&D and capital expenditures in 2024 will be significantly lower than in 2023. As for 2025, we have not yet started budgeting for next year, so there is currently no clear estimate, but we expect overall spending intensity to be similar to this year.

The reasons for the increase in sales and management expenses (SG&A) in the second quarter are mainly twofold. Firstly, in the first quarter, we delivered approximately 30,000 vehicles, while in the second quarter, deliveries exceeded 57,000 vehicles. With the increase in sales volume, personnel costs naturally rise, mainly due to the expansion of the team and increased incentive policies for the sales team. Secondly, in the first half of this year, we launched multiple new models such as L60, and released many new NIO products from March to April. The launch of these new models brought about a series of marketing and promotional activities, which also drove the increase in expenses in the second quarter compared to the first quarter.

Q: Could you share the average rental cost of ONVO stores compared to NIO stores? Additionally, how many employees are planned to be stationed at ONVO stores, and what differences will there be compared to NIO stores?

A: Regarding the opening of ONVO stores, we require the team to proceed in a fast and efficient manner. Therefore, the capital expenditures and rental costs of ONVO stores are significantly lower than those of NIO stores. However, due to differences in store locations and types, specific costs may vary, so we do not have detailed comparative figures. But overall, the expenses of ONVO stores are much lower than those of NIO stores. In terms of renovation costs, we have set very strict requirements for each ONVO store. For the 100 ONVO stores that have already been opened, the renovation cost per store does not exceed 1 million RMB. For an additional 100 stores planned to be opened by the end of the year, we will further tighten the renovation cost requirements to more efficiently utilize existing resources for renovations As for the number of store employees, it will be adjusted based on the orders and delivery volume in each city. Overall, we will ensure that the team is configured as streamlined and efficient as possible.

Q: Can you share in detail the progress of NIO's intelligent driving NOP? Especially in terms of consumer acceptance rate, disengagement rate, scene coverage, and regional expansion?

A: Regarding NOP, currently, there are over 300,000 users using this feature, which is provided as a standard feature of the NT2 project. Vehicles equipped with NOP and NOP Plus have collectively driven over 1.1 billion kilometers. Therefore, whether in terms of user base or total mileage, NIO is in a leading position in China.

In terms of the technical roadmap, many players in the industry, including Tesla and other domestic manufacturers, are focusing their technical solutions on end-to-end models. For NIO, we are also developing end-to-end models and have launched the first feature based on an end-to-end architecture - end-to-end AEB (Automatic Emergency Braking). Its performance is significantly better than traditional AEB, with a 6.7 times increase in scene coverage. Additionally, we have released a world model based on end-to-end technology, which is a significant technological breakthrough for us in this field. Furthermore, we have also introduced NAD ARC 2.0, an end-to-end architecture developed based on NIO's working model, which enables faster feature iteration, better user experience, and cost reduction.

Regarding the LeDao brand, using a single Orin X with a pure visual technology solution, it performs excellently even in urban driving scenarios. I recently tested this feature in Shanghai, and the experience was very good. Therefore, overall, we believe that intelligent driving features can not only significantly enhance user driving safety but also continuously optimize the actual user experience.

Q: With several new models set to be released before the end of the year, we have noticed different consumption trends between tier 1 and tier 2 cities, with stronger consumption in tier 1 cities. In this macro environment, can you share how NIO and ONVO are expanding through products, technology, and services to address these macro pressures while maintaining quarter-on-quarter growth? Can you further elaborate from the perspective of channel order trends and the latest consumer feedback?

A: We are well aware of the intense competition in the current market, but this is not the first time we have faced such fierce competition. Over the years, NIO has consistently maintained a stable market share in the high-end market, mainly due to our diversified and rich product portfolio in the high-end segment. The models we offer include ET5, ET7, ES6, EC6, covering multiple product submarkets, and many models lead in sales in their respective pure electric vehicle submarkets. Even some niche models, such as ET T, EC7, or EC6, have outsold some competitors of traditional fuel vehicles in their respective submarkets.

Overall, our product portfolio strategy has been very successful. Additionally, we have significant advantages in charging and swapping networks, leading technology, high-quality product experience, services, and user community, further solidifying our position in the high-end market. At the same time, we welcome more players to enter this market to collectively expand the scale of the high-end electric vehicle market From the company's overall development strategy, we have three clear growth paths. Firstly, starting from next year, we will have three brands in the market with a wide price range ranging from 140,000 to 800,000 RMB. After using battery rental services, the price range will further expand to 100,000 to 700,000 RMB, creating strong competition with fuel vehicles in the same price range. Secondly, through a wide range of product portfolios, each brand has clear differentiation, covering multiple segmented markets. Lastly, through the expansion of market and regional coverage, we are expanding sales outlets to lower-tier cities and expanding our charging and swapping network through the county-level "Power Up" plan. This initiative will help us further expand our market coverage, especially in our overseas business development plans. Overall, our long-term growth trajectory is very clear, covering a wide range of prices, product types, and regional coverage.

Q: Regarding the flagship sedan ET9, it is reported that the model is planned to be launched in the first quarter of next year. Is the schedule still on track? Additionally, could you share updates on the new technological applications and market positioning of this model, as well as the sales target outlook?

A: Regarding the progress of ET9, we are still proceeding with its release according to the original plan, and there have been no adjustments to the timetable. As you may know, ET9 is equipped with many new technologies, including steer-by-wire, fully active suspension, self-developed chips, and the SkyOS operating system. Therefore, we will continue to work hard to ensure the smooth release and launch of this product next year.

Q: Regarding the opening of stores and deliveries in the UAE, can this be understood as an adjustment in the expansion direction due to EU tariff policies, shifting towards the Middle East market? Additionally, some competitors have overseas sales accounting for over 10% of their total sales. Do you think this can be a reference target for Nio's overseas expansion in the next 1-2 years?

A: Regarding our progress in international expansion, our strategic direction has not changed. Despite the tariffs in Europe increasing the cost of exporting from China to Europe, we will continue to focus on the five countries we have already entered. We understand that establishing a high-end brand like NIO in the European market will take more time, so we remain patient. However, this does not mean we have stopped our activities in Europe. Earlier this year, we opened the NIO House in Amsterdam and continue to deploy battery swap stations in Europe, so our plans remain unchanged.

As for the plan to enter the UAE market, you may know that we received a $3 billion strategic investment from the Abu Dhabi government last year, and entering the UAE market is part of this plan. We will collaborate with strategic partners in the UAE to provide products and services to the local market.

Starting from next year, our international expansion will be more active as we will not only introduce NIO brand products but also launch products under the ONVO and Firefly brands, which are more suitable for the global market. However, we will also maintain a good balance between investment scale and efficiency to ensure that we enter the global market in a smarter and more efficient manner Q: In your opinion, what is the potential growth rate of the electric vehicle market in China in the next few years? Some investors believe that the penetration rate of electric vehicles may decrease recently, especially with the high penetration rate in Europe. How do you view the penetration of electric vehicles in the next three years?

A: Firstly, looking at the Chinese passenger car market in the first half of this year, the growth is around 3.6%. In the long term, the total number of passenger cars in China has reached a scale of 20 to 30 million, which is a very substantial base. Although there will continue to be growth in the future, the growth rate may not be significant, and even a slight decline is normal. However, even so, China will still be the largest passenger car market globally.

As for the penetration rate of new energy vehicles, it has already exceeded 50%, and I believe this growth will further accelerate. Once the penetration rate of electric vehicles surpasses the 50% threshold, the speed of replacing traditional fuel vehicles will be faster. Taking Norway as an example, its electric vehicle penetration rate rapidly increased from 50% to 80% or even 90%. Therefore, I believe that in the next 2 to 3 years, the penetration rate of new energy vehicles in new car sales in China will exceed 80%.

Regarding the traditional fuel vehicle market, it has actually entered an unsustainable vicious cycle. Many fuel vehicle brands have had to lower prices to maintain market share, including both high-end and mass-market brands, whether Chinese or foreign. This price war not only weakens their profits but also affects the interests of dealers, brand image, and product residual value. This has led to a faster decline in their competitiveness in the market than expected. In recent years, we have seen a significant decline in market share for Korean brands like Hyundai and Kia, and even brands like Ford and General Motors. Recently, Japanese brands such as Toyota, Honda, and Nissan are also facing similar challenges. Therefore, the competition for joint venture fuel vehicle brands in the future will be very difficult, with the market share they lose often being replaced by Chinese and European new energy vehicle brands. Based on this, I believe the penetration rate of new energy vehicles will grow at a faster pace than expected.

Q: Regarding Firefly's product line. Are there plans to launch 1 or 2 models in 2025?

A: We plan to start delivering Firefly products in 2025, and the current product preparation work is progressing smoothly.

Q: Regarding the SkyOS operating system released by the company in July. It demonstrates the company's comprehensive capabilities in self-developed software. Could you provide detailed information on the technical challenges encountered during the development process, as well as the advantages of this system and its impact on product performance improvement?

A: Regarding SkyOS, it is the world's first global vehicle operating system, which is the unique feature of SkyOS and the main challenge we faced during development. In the era of smart electric vehicles, traditional decentralized operating systems are no longer effective in managing the vehicle's electronic architecture, so we developed SkyOS.

The SkyOS architecture is divided into three levels: the bottom layer is SkyOS's virtual machine manager, the middle layer consists of four kernels, and the top layer is SkyOS's middleware. This is a very comprehensive solution that was completed through four years of development and the collective efforts of over 20,000 developers. In terms of system advantages, SkyOS not only makes vehicles safer and systems more stable but also improves the efficiency of research and development and system iteration It helped us solve key issues faced by smart electric vehicles, such as large data throughput, inter-domain data fusion, and communication latency issues. These technical challenges cannot be solved by application layer optimization alone and must be innovated from the ground up. We are very pleased to achieve this goal. In the future, SkyOS will be applied to brands like Nio, ONVO, and Firefly, making it the core foundation for our future product and technology development.

Q: We noticed a significant increase in gross profit margin in the second quarter, could you explain the main driving factors? Additionally, what are your expectations for the future trend and sustainability of gross margin improvement? With the growth in sales, especially in charging and battery replacement services, is it possible to achieve profitability in the future?

A: Regarding the situation of other income in the second quarter, we significantly reduced the losses from other businesses in the second quarter for two main reasons. Firstly, due to the increase in user deliveries, especially after the launch of the 2024 version of the after-sales service policy on February 20 this year, our after-sales service efficiency and profitability have improved significantly. Secondly, we separated the lifetime free battery replacement service from vehicle sales, and more new users need to pay for the battery replacement service, which has increased the revenue and profit margin related to the replacement service. Therefore, we successfully reduced the losses from other businesses. In the future, with the continuous growth of user base and sales volume, especially with the launch and delivery of ONVO products, the profitability of other businesses will further enhance, and we expect these businesses to achieve breakeven or even profitability.

As for the profitability of the battery replacement service, if a single battery replacement station can complete more than 60 replacements per day, and the charging level for all replacement services is equivalent to supercharging, then the station can achieve breakeven. Currently in China, we have over 2500 battery replacement stations, with an average of about 30 to 40 replacements per station per day. Therefore, the transition from 30-40 replacements to 60 is not far from achieving breakeven for the battery replacement station.

However, the battery replacement business is still incurring losses at the moment, mainly due to two reasons. First, we provide lifetime free battery replacement service for early users, which increases the operational cost burden of the battery replacement stations. Second, during the business expansion and network layout process, we realized the important role of network effects of battery replacement stations in increasing sales volume. Therefore, we actively deployed stations in advance, even though sometimes the demand for these sites has not fully materialized, leading to additional cost burdens from early deployment. Overall, achieving breakeven for a single battery replacement station is not far off, but considering its role in driving sales volume, we decided to deploy multiple stations in advance, which is also one of the reasons for the business losses